The RBA throws a bucket of cold water

The RBA’s November Statement on Monetary Policy was released this morning and shows the bank in retreat from both its inflation concerns and growth forecasts. Growth for 2011 has been cut 0.25% to 1.75%. Growth for 2012 growth has been cut 0.5% to 4%. CPI inflation has been cut from 3.6% to 3.25% for 2011 and underlying inflation from 3.25% to 2.5% for 2012. In fact, underlying inflation is not seen rising towards 3% until late 2013. Here is the new table:

It is interesting to note that as late as May, the RBA was forecasting 3.25% for this year so it’s missed by almost half. In May it was forecasting 4.5% growth for 2012 but even its revised 4% target looks more than ambitious to me. Even if we disregard any international weakness, the lesson of 2011 is surely that the adjustment of the Australian private sector to lower rates of credit ensures sub trend growth even in the presence of a mining boom. I guess it’s just not done to mention such things.

Instead we have a rather optimistic base case for the global economy:

The IMF’s September forecasts were for global growth to be around trend in 2011 and 2012, with annual growth of around 4 per cent in each year. These forecasts are weaker than three months earlier, with the downward revisions largely reflecting a softer outlook for the euro area and the United States, where concerns about the sustainability of sovereign debt positions have increased uncertainty and lowered confidence. The Bank’s central scenario is a little weaker than the IMF’s forecasts, mostly reflecting a more pessimistic view on Europe. Growth in emerging economies is, however, expected to remain firm, contributing around three-quarters of total global growth, although it has also been revised down modestly given trade and financial market linkages to the advanced economies.

But this optimism is offset by the document’s heavy weighting towards risk. First the RBA acknowledges the terms of trade have peaked, for good:

For some time, the Bank has been expecting that the terms of trade would gradually decline as global production of resources, including coal and iron ore, increases (Graph  6.2). The recent falls in commodity prices and the slowing in global demand suggest that the peak in the terms of trade has now been reached and indeed the recent significant falls in the price of iron ore suggest that the decline could be happening a little faster than earlier expected. However, assuming continuing solid growth in China, commodity markets are likely to remain quite tight and the terms of trade are forecast to remain at very high levels compared with recent decades.

Then it’s on to the domestic economy where Dutch disease and disleveraging are expected to continue:

Growth over the next few years is expected to be driven by mining-related activity, with belowtrend growth in the non-mining economy. With the announcement of final investment approval for the Wheatstone LNG project, a pipeline of close to $150 billion in LNG projects is now approved or under construction. Significant expansions to iron ore and coal production capacity are also underway, and will contribute to solid growth in resource export volumes over the next few years.

The near-term outlook for the overall non-mining economy remains subdued, with conditions likely to continue to diverge across industries. Business surveys and liaison suggest that investment intentions for the next year have softened over 2011, reflecting the high level of the exchange rate, the unwinding of the earlier fiscal stimulus and the greater uncertainty about the outlook for global growth. Further out, a gradual recovery is expected in non-mining investment, although the recovery is forecast to be more muted than following previous downturns.

The household saving ratio is expected to remain at around current levels over the forecast period. In the near term, household spending is likely to be affected by the decline in net wealth from falls in equity and housing prices, the fall in sentiment and increased concerns about the risk of unemployment. Over the next few years, however, household spending is expected to grow broadly in line with income growth.

Goodness me, that last paragraph is a shock to the system. One wonders how the RBA expects to reach its 4% growth target with three quarters of the economy going backwards. Still, bravo for the candor.

Still on risks, and the RBA sees Europe as the major problem, as well as possible upside risks if US housing were to rebound, which is unlikely. Again on the sobering front, the RBA sees Australia in the firing line in the event of a European recession:

The possibility of a sharp economic deterioration in Europe represents a downside risk for the Australian economy. Given strong trade links with Asia, it is likely that Australia would be less directly affected than some other countries by a deterioration in Europe, although the economy would still be affected through falls in asset prices and weaker household and business confidence. Commodity markets could be expected to weaken and growth in domestic incomes would be lower. While there is a large pipeline of committed LNG projects that would be expected to continue, some planned expansions to coal and iron ore capacity could, in a downside scenario, be delayed. It is also likely that there would be a depreciation of the exchange rate, which would provide some offset for the economy. Overall, however, demand growth could be expected to be weaker than in the central forecast.

Personally I’d say that this is now the base case and the earlier material an upside risk. But either way, don’t say you weren’t warned.


  1. I’m not sure how the AUD is staying where it is when the ECB has admitted that a recession is coming there and the RBA lowers forecasts for Australia’s growth.

    Does anyone know when the Government will review their budget? There is likely to be a revision to their forecasts showing a bigger hole in the budget than anticipated.

  2. I read the Statement earlier today and mostly agree with your review (with the obvious exception of reference to DD not contained in the Statement). The candour was appropriate and welcome given the uncertain global economic environment – too much potential downside there for anything other.

  3. They can always revise down – example 2011! But yes – ambitious and only possible if resources hold up.

  4. I agree. I’m not sure where this will come from. I’m sick of these officials and their rosy forecasts which they always end up both downgrading and subsequently, missing anyway.

  5. Why is it that at present every Central Bank and govt vastly overestimates their economy’s future growth? I mean we’re talking double the reality in a lot of cases.

    Either their models dont work, or its just boosting.

      • Precisely,

        I doubt you would ever hear the absolute truth from any government in order to keep errr….order!

        There could be a comet heading toward earth to wipe us all out and I doubt you would hear peep from Goolia and Goose.

      • The problem is, if they lie too many times nobody will believe them anymore and that in the long run hurts them more than telling the truth.

  6. Growth for 2011 has been cut 0.25% to 1.75%. Growth for 2012 growth has been cut 0.5% to 4%.

    I agree with Bear Jew, lucky to see 2% this year or next 1.5-1.75% sounds about right.

    I remember seeing a chart somewhere (unfortunately I don’t remember where) that is basically what we’ve averaged since 99-2000. On the other hand I just looked it up and I’ve got 3 & 4% figures. So I’m a little befuddled.

  7. Cognitive dissonance is alive and well at the RBA.

    Hear hear! And as a result IR have been too high for far too long. Consequently many will have or are about to lose their businesses (insolvencies and bankruptcies are rapidly accelerating), their homes, and possibly their relationships. Now the saving face story has to be progressed. Forecast growth rates are ridiculously high, and have no bearing on reality (Europe, UK, USA and Japan are going to be basket cases for at least a decade and this information has been obvious for at least 18 months or more), so that on a monthly basis they can down grade their forecasts and reduce rates gradually. The MSM economists have aided and abetted the RBA in their disinformation and misinformation campaigns so as not to be disadvantaged.

    For the punters, the RBA and MSM economists and the profession itself is either rapidly losing credibility or has already lost it. It won’t be too long before they will be calling for the head of the RBA because as with Juliar we have stopped listening!

    • How can IR have been too high for too long when over-leveraging has produced a massive debt bubble?
      The problems are due to too much debt……I thought we all, in these pages, agreed on that?

      • Credit growth has been trending down since 2007 and certainly since 2009.

        The overleveraging occurred up to 2007. Yet to be proven is: “has the GFC changed people’s attitudes to debt?” You obviously think not and wish IR to be at current or higher levels. You need to identify and state your chosen indicator / indicators that determine when IR’s are too high in YHO! Please share with us your decision indicators.

        Dis-leveraging or de-leveraging has been occurring (as per reported increased savings). Higher than necessary IR’s are destroying SME who employ 64% of the workforce. The flow on effects when hoarding ceases will not be pretty. If you were under 30 in the early 1990’s you will either not understand the impact or have empathy for those who suffered during the recession we had to have. (Some have to have the experience before they learn). If you were over 35 during that period you were virtually unemployable once you lost your job. You had to buy yourself a job (SME) or start one. Tough going in the middle of a recession!

        We have to separate our desire to create / wish for a housing crash so that we can get into the market from creating a recession / depression. The long lags in IR movement impacts and unemployment suggest that we should have acted sooner given the wider global conditions IMHO.

      • The BurbWatcherMEMBER

        We’ll just devalue and probably eventually destroy the currency with ZIRP for a long time…

        –> IR is one’s premium one on one’s currency.

        The lower it is, the lower one values the currency unit.

        My 2c

      • True Burb…at zero or negative rates the value of EVERYTHING becomes infinity. 🙂 So this process cannot go on forever.

      • Well on the positive(?) side, a housing crash may just cause the banks to re-evaluate their obsessive focus on housing lending at the expense of the business (particularly SME) sector.

      • obiwan

        I think our main difference is time frame. I agree with you if one is just looking at the next couple of years. I agree SME’s are being destroyed by corporatism and I operate right in the middle of that particular phenomenon.
        The matter of just how high interest rates are in general is not so much the issue as to the way corporates are funded vs the way SME’s must fund themselves.

        We have arrived at this poorly structured economy through Negative RAT IR and high credit growth. The high credit growth did not result in inflation except in things we could not import. The effect of China gave us low inflation AND a chronic CAD.
        After years of credit growth of 14 to 15% it is not even that credit is being reduced. It just isn’t growing as fast as it used to.

        By lowering interest rates now you are only trying to maintain the structure of the economy as it is now by again expanding debt levels at the old rate in the same parts of the economy as before. This cannot go on forever. At some point sooner or later we will CRASH into the end game of that play.

      • Sorry obiwan…I note your request for my decision indicators. It’s a long story and requires pages of text and I don’t have the time (and maybe the energy 🙂 ATM. I acknowledge that your request on this is a reasonable one and will try to get back with some detail. I have espoused them in these pages over some time but if you haven’t been following it’s a bit difficult to piece together.

        Note as to when I have lived FYI and perhaps give you some idea of the direction I come from. I was born in 1949 so I’ve lived through and seen quite a bit. My perceptions on economics are based on my observations and, indeed, my struggles with the supposed cognisante of economics through through the period from about my university days around 1970 until now. I have a wide range of life experiences from economist through to running farms and SME.
        It doesn’t make me better than anyone else just a fairly different slant as to what is wrong.
        I’ve been a keen follower of Steve Keen since hearing him on the radio in about 2005 when i found someone who could see what I could see. My only difference with Steve is that he, like everyone else ignores the external account I understand his reasons for doing so in resepect of his models. The others just espouse a position of ignorance IMHO 🙂 However in terms of policy it has been, and is, a disaster to ignore the external account.

  8. I remember years ago…perhaps 15 now…my memory is getting too long!
    Some bloke worked out that if you took out all the money that had been spent on security as a result of the increased crime, there had been no growth.

    In any case, our definitions of ‘growth’ are pretty ordinary. DE’s take about the best I’ve seen.

  9. OK so we have had 50 years of low inflation based on the emergence of Asian economies and their deflationary effect on pricing. This has particularly applied to China in the last 30 years.
    I won’t go over the details again but here we have an inflation forecast that does not even mention China once…except to say that it might save us from as severe a dip in growth.
    Yet, in their statement on interst rates this week they indicated that the 15% inflation coming out of China had been offset by the rise in the A$.

    So how can we discuss inflation without looking at China?